Key Person Life Insurance
Protect Against The Unexpected
The untimely death of a key person – such as an owner, partner or majority shareholder – often has a significant impact on a closely held business. Replacing the expertise and knowledge of an essential individual can take time and money – and may even jeopardize the continuity of the business. You’ll also need to assure creditors and customers that everything is fine. A key person life insurance policy can help the transition.
- Help heirs meet estate tax obligations without compromising or dissolving a family business
- Keep the business running and assure creditors and customers that the company will operate as usual
- Reduce the impact of the untimely death of a key individual by covering expenses of finding and training a suitable replacement
- How Key Person Insurance works
With Key Person Insurance, the business buys a life insurance policy on the life of the key executive, and is the owner and the beneficiary of the policy. The business pays the entire premium and will receive the entire death benefit. The executive does not have any interest in the policy, nor does his family receive any benefit from it when death occurs.
Key-person insurance benefits are often used to buy out the insured person's shares or interest in the company. Buy-sell agreements, which require the deceased executive's estate to sell its stock to the remaining shareholders, legally facilitate this process. Proceeds from key-person insurance can also be used to recruit replacement management.
Premiums for key-person insurance are based on a variety of factors, including age, physical condition, and health history of the key person, as well as the amount of coverage. Before purchasing key-person life insurance, a business owner should:
- Estimate the value of key employees. It may be difficult to estimate the value of an irreplaceable employee, but you must do it to determine if you need to purchase key-person insurance and how much coverage you'll need. Consider factors such as projects that would be lost if the employee were no longer with the company, the amount of sales generated by the key employee, and the costs associated with replacing the employee.
Determine if separate key-person insurance is necessary. Credit insurance is one way to cover outstanding loans and debts. If you already have a credit-insurance policy, key-person